The economic playing field has gotten complicated enough that it’s foolish to step on the field without some idea of how you’re going to win. In sports, you have a playbook, which lists the plays you can make. In business, we call these “tactics.” You also need a strategy, a way to combine those plays so you win the game. While it’s possible to win without a formal strategy, having a good strategy can often give you a leg up. You’ll form the best strategy by looking both inward and outside.

For example, you may have invented an electric car that you sell to shipping companies. That’s given you expertise in creating electric cars, and you have expertise selling to shipping companies. You can grow your business by concentrating on bringing your technological expertise (electric cars) to new markets. You can also grow your business by developing new products to sell to shipping companies. In the first case, you’re organizing your strategy around your technology. In the second, you’re organizing around a particular set of customers. Which you decide to do is entirely up to you.

When I worked at Babson College in the team formulating the strategy of the school, Babson was ranked the #1 school for entrepreneurship, world-wide. This gave us an explicit decision: do we ignore the ranking, and (try to) build some other brand for the school, or do we concentrate in entrepreneurship. Babson chose to continue building on entrepreneurship. It didn’t have to, however. Making the choice explicit led to initiatives that would never have happened without that self-examination.

Look outwards to the environment

Great resources aren’t enough. You might have the biggest bank account in your industry, but if your competitor also owns your industry’s largest distributor, you’re going to get creamed. Your landscape determines which (if any) of your resources can help you win.

The most famous model for understanding the strategy landscape for crafting your business strategy is Michael Porter’s “Five Forces” model. My favorite is a later extension of Porter’s model, the “value net,” presented in the excellent book Co-opetition by Adam Brandenburger and Barry Nalebuff. With a value net, you look at the world around you: competitors, substitutes, suppliers, customers, complementors, and barriers to entry. You design your strategy taking into account what each part of your value net brings to the table, and how that meshes with your business goals.

For example, your industry might be dominated by two or three suppliers. That gives the suppliers tremendous negotiating leverage, and the ability to cut you out of the market if you don’t agree to their demands. Furthermore, it makes your business vulnerable if one of the suppliers encounters a disruption, since you don’t have many alternatives.

Good business strategy sometimes happens by magic, but you don’t want to bet the farm on Tinkerbell being in the right place, at the right time. Formulate your strategy by deciding how you can best deploy your internal resources given how your industry’s value net looks today. Times change quickly these days, and an integrated approach to keeping your strategy current will keep you at the top of your game.

Become a compulsive business model collector

Often, a company’s business model constrains what it can and can not do. That, in turn, gives it strengths and weaknesses. Learning to spot business models, and do quick back-of-the-envelope calculations on them, will help you become a ninja at spotting opportunity.

When you see a hot pretzel vendor at a ballgame, ask yourself: what’s that person’s business model? How do they make money? How much product or service do they need to sell to make that money? How much does it cost them to make it? Is it a good business? Hot pretzels being one of my favorite foods as a college student, I was astonished to learn that the hot pretzel vendor cleared a six-figure income.

When you pass the neighborhood bookstore, ask how they stay in business? What’s their business model? Why does it work for them, and not for the bookstore down the block that went out of business five years ago?

When you use Facebook, ask and consider: what’s their business model, and what does that imply about the actions they’ll take? Or eBay? Or Uber?

Business models give policy insights

In a recent Facebook flame war, we were discussing different kinds of health insurance systems. Understanding the business model of an insurance company might give you some insight into their incentives and potential actions:

Health insurance companies make money through underwriting profits (premiums minus payouts and expenses) and investment income on the premiums they collect.

Insurance must ALWAYS be priced higher than needed to pay out because all that administrative overhead, salaries and buildings, needs to be covered.

Now, when we formulate our own opinions about healthcare policy (which we all do, rather than simply parroting our favorite pundit, right?), we can at least understand that the business model of insurance companies constrains their actions.

Your assignment:

Every time you interact with a business today, ask yourself:

How do they make money? Where does their cash come from?

In order to make that money, how much do they have to spend, and from where?

What are the levers that their business models allows? What are the risks and benefits of their model?

Pretty soon, you’ll discover you can spot opportunities to bring business models to places they’ve never been used. Often, you’ll discover there’s a reason they weren’t used there. But other times, you’ll find that a shift in business model just might make you the next PayPal.

If you want to read more about [my thoughts on the insurance example implications, keep reading…

Health Insurance Business Models Drive Policy

IMPORTANT DISCLAIMER: This is intended as an example of how understanding a business model leads to confidence in predicting the behaviors of people who use that model. This post reflects my layman’s understanding of insurance business models. If anyone knows better, please please correct me.

For you gentle readers who also don’t know the inner workings of the industry, read this to understand how a business model leads to predictions of behavior. Do not read this for accurate information about the insurance industry.

For-profit health insurance companies must overcharge

I’m guessing that competition will not produce efficient health insurance. Health insurance companies make money only two ways: through underwriting profits (premiums minus payouts and expenses) and investment income on the generated float.

Insurance will always be priced higher than needed to pay out because all that administrative overhead, salaries and buildings, needs to be covered.

Furthermore, as long as we have a market that defines “healthy” profits as profits that grow yearly, there will be ever-increasing pressure to raise profits. That means raising revenues and cutting costs.

You can only cut costs so far on the admin side. But you can reduce your payouts by writing ever more complicated policies that in fact cover less and less. You can also challenge payouts, make the reimbursement process deliberately more cumbersome, lower the ceilings of what you will cover, etc.

And of course, regulation caps permitting, you can always raise revenue by raising premium prices.

Every year, due to the market expectation of continually growing profits, all these forces will come into play. (Premium prices will rise, and people will blame Obamacare or the lack of Obamacare or greed or whatever. It’s just the way growth-oriented markets work.)

Any for-profit insurance company will feel all those forces as a simple matter of doing business. So any for-profit insurance company in a competitive market will be pressured over time to do these things.

Even if their investment income is reliably positive, they can’t control that nearly as quickly, easily, and reliably as all these other forces. And if the company is heavily invested in derivatives (which Warren Buffett calls “Weapons of Mass Destruction”), well, at some point there may be a “correction.”

There are competitive pressures at play, as well. Price wars. When a competitor lowers premium prices below the actual rational value for a given policy, a company is pressured to match that pride and write unprofitable policies in order to compete … resulting in pressure to make up profits from one of the other sources1.

That’s why private mutual insurance companies are a good thing. They still have these pressures, but at least the policyholders own the company so the company’s goals are more aligned with the goals of its members.

This is one source of Warren Buffett’s wealth. When he acquire an insurance company, he gives them permission to stop pricing policies below expected payout values, even if there’s a competitive price war going on. ↩︎

Want followers? Want to get more from a negotiation than you go in expecting? Want more loyal relationships with your employees? Want people to be committed to your cause? Want deeper friendships and romantic relationships?

Empathy is the key. It’s the ability to understand what another person is feeling, even if their situation is unlike yours. Empathy is the foundation for relationships, for anticipating others’ needs, for anticipating hot buttons, and for being able to help others. It’s even where great inventions and innovations come from—understanding someone else’s world so thoroughly that you solve problems they didn’t even realize were solvable.

Empathy is a skill, and it can be learned. It’s usually learned face-to-face, but in the wonderful world of technology, we don’t get nearly as much facetime as we once did. But it’s still possible to learn and exercise your empathy skills, explicitly.

We’ll use gender and race as examples, because we can all find someone of different gender and race, and this exercise will help us glimpse into their very different worlds.

In day-to-day empathy, you can even use this with very similar people. Because even people from very similar circumstances can have dramatically different experiences.

Their reality may not be directly knowable

My female friend Vinda told me she never walks home alone after 11 pm. I scoffed. I’d lived in that neighborhood for over ten years. We’d even walked home together. It was perfectly safe… no catcalling, harassment, or anything. Ten years.

I began casually asking women who lived in that neighborhood if they walked home alone. My friend Lauren is a black belt. I asked her, and she looked at me as if I was nuts. “Of course. I’ve always had to do that. All women do that. Why do you ask?”

That’s when I realized that my life as a man is fundamentally different from my friends’ lives as women. When I’m with them, the world is one way. When they’re alone, it’s different. And it isn’t knowable by me, because my very presence changes it.

Find out about their life

Ask them about their life. Let them tell you, and trust the answers. This exercise isn’t about deciding whether you agree with them; this is about learning how they experience their life, from their perspective. Ask them to tell you about what it’s like to be at home, at work. What do they worry about? What do they take for granted? Where do they feel safe? Unsafe? Loved? Ignored? Noticed?

If you have an opportunity to learn about and observe their life directly, take it.

Imagine their life from outside

Once you have an idea of their life, make a mental movie of what their life is, as reported by them or as you’ve seen it first-hand. Things to consider:

What is it like to live in their neighborhood? Their apartment? Work in their office? What is their commute like?

Who are their friends? What do they do together? What clothes do they wear? What do they do for fun?

How do other people treat them on a daily basis?

What do they worry about? What are they confident about?

For a short time, I was a “Big Brother” in the Big Brothers / Big Sisters program. My “Little Brother” was an African-American boy. When we would walk down the street together, people would turn and stare. Pretty much everywhere. It was a freaky experience for me, as I’d never experienced that. As a black boy, he experiences that every single time he walks through a predominantly white neighborhood.

I imagined what it’s like to live his life. Where he’s never experienced walking through a group of white people without having them look at you with curiosity or suspicion. Where the only people he can relax with are people of color, with cultural norms, language, hopes, and fears that aren’t the same as white people.

Now, take their perspective, literally

Now that you’ve got the movie of their life, rewind it, and mentally step into it, so you’re looking through their eyes. Roll the movie, and notice what their experience is like. The notice the feelings that you/they have as they live that experience.

In one of my more dramatic examples, I was talking with a friend who had said “Yes” when they meant “No,” and ended up doing drugs they really didn’t want to do. My friend explained how important it was to be liked by the group. And in that situation, from their perspective, they thought saying “No” would make them look scared and foolish in front of their friends.

Succumbing to peer pressure is really not a big issue for me. So I decided to empathize.

I imagined the scene from the outside: a group of friends sitting around in a circle, passing around drug paraphernalia. Everyone’s laughing and joking, and saying, “C’mon, just give it a try. We’re all doing it; it’s fine.” I imagine my friend cringing back, but nevertheless accepting and taking the drug.

Stepping into the movie. I suddenly felt a clenching in my chest. A thought came to mind: “I really don’t want to do this, but if I don’t, I’ll be an outsider. They’ll stop inviting me places. I’ll be all alone.” My friend’s fear, longing, and conflict; it all became real to me in that moment.

Your results will vary; that’s a good thing!

Empathy is individual. My Little Brother’s experience may not apply to all black people. Maybe just black men. Or maybe just him. And maybe my imagination of what it’s like to have all eyes watching distrustfully is nothing like the way he experiences it. You can always describe your experience and ask. With practice, you’ll get better at it. We all have the ability to feel empathy Your brain is built to make this work.

Give it a shot

There are a lot of chances to practice this empathy technique. Start with friends and family members, people you already know well. Then branch out. Try someone of a different race or religion. Try someone of a different race or gender. Try someone on the opposite side of a political issue. Try someone of a very different socioeconomic class.

This will be a stretch. You’ll need to learn something about the other person’s situation in order to gain the insight. While you can still get a surprising amount of benefit by simply constructing your own idea of what their life is like, you’ll get the most by seeking out the other person, asking questions, and listening. You won’t be listening to engage or react, however, but to learn. And to trust that, at least during this exercise, they’re reporting their real experience to you.

Empathy is the foundation for human relationships. It’s what lets us build bridges to people who aren’t like us, and even to people who are. Take the time to build your empathy muscles explicitly.

My article on the duties, responsibilities, and job description of a CEO, lays out four inherent parts of a CEO’s job. These are the parts of the job that, by definition, make a CEO a CEO. The CEO can delegate some things, but others simply can’t be delegated. Capital allocation is the CEO’s fourth main duty.

Allocating capital is the ultimate expression of strategic priorities.

Trump manages money

So far Trump has shown that he takes money very seriously. His position on many international bodies and on America’s role in the world is that all countries should help foot the bill for international costs. His stance so far has, indeed, prompted some countries to step up and contribute more to the U.N.

Domestically, Trump has instituted a hiring freeze on the Government and is presumably going to look at spending within the government.

Like everything else, this is more complicated than it seems. Government spending is a huge driver of the economy, and the government is the largest employer in the country. A business certainly wants to lay off as many employees as it possible can and still keep functioning. That’s how we boost profits.

A government, however, is walking a trickier line. A business is generally not affected by the employees it lays off, or by any reduction in its own spending. But not so, a government. Stop spending too quickly and lay too many people off and it simply drives up unemployment and slows down the economy.

Will spending cuts be done wisely?

In companies, spending cuts can be done by declaration: “cut 30% costs across the board.” This is an attractive way to do things. It’s easy to understand and easy to calculate. But it’s a bad way.

This kind of cutting assumes that there’s 30% waste across the board, and it assumes that all cuts are equal. All cuts are not equal. If you consider a company like Microsoft, cutting 30% of their administrative expenses might be a reasonable goal. But cutting 30% of their programming staff would boost their quarterly earnings while probably destroying their ability to fix bugs and develop products to stay competitive.

Spending cuts + process improvement = win?

The fundamental way to reduce costs in an ongoing business is through process improvement, finding ways to do existing things better.

While the stereotype of the Government is that it is extremely wasteful, that is an oversimplification. Some Government programs (e.g. Medicare) are extremely efficient, much moreso than their private counterparts. Other Government programs (e.g. famously, the Defense Department) have huge amounts of waste.

What matters isn’t whether or not the Government runs a program. What matters is whether there are incentives and structures in place that encourage people to work smarter, work better, and improve continuously.

What gets measured gets … measured

George W. Bush was a Harvard MBA who famously was going to bring business principles to the Government. It’s not clear he did much of that. No Child Left Behind introduced measurement into the educational system, but did so in a way that many teachers view as hindering education, not helping it. The Total Quality movement of the 1970s and 1980s showed that simply setting numeric goals without adding process improvements to reach those goals isn’t, in practice, particularly effective.

The business practices that might help the government use its money more efficiently are those of aligning incentives, re-engineering processes, tying employee pay and promotions to customer feedback, and so on. If Trump implements this kind of thinking in the government, it could, indeed, signal a major shift in how efficiently we use our money.

Big allocations reveal priorities

The capital allocation I was referring to in the CEO job duties article weren’t just cost efficiency. The most important capital allocation decisions are the ones that decide which strategic initiatives stay, and which go.

Whether Trump’s spending will be thoughtful or abrupt remains to be seen. He has already declared his intent to increase military spending, while freezing other budgets. He has given directions for us to build a wall between the U.S. and Mexico. He has stated we will increase infrastructure spending, while possibly withdrawing from international bodies (such as the U.N.) to which we pay dues.

The President doesn’t control the budget

Though Trump can control how capital is allocated within the Executive branch, it’s Congress that sets the overall budget (or often doesn’t, in the cases where we’ve had a Democratic President and a Republican-controlled legislature). Trump can fund or defund the efforts to implement programs created by Congress, but there are limits to how much control he has over the national budget.

Summary

At this point, it’s too early to tell how Trump will allocate capital. If his skills match his claims as a successful businessman, he may well find ways to steamline the government and put it on a path to being more efficient. His larger capital allocation decisions remain to be seen, however.

My article on the duties, responsibilities, and job description of a CEO, lays out four inherent parts of a CEO’s job. These are the parts of the job that, by definition, make a CEO a CEO. The CEO can delegate some things, but others simply can’t be delegated. Setting culture is the CEO’s third main duty.

The CEO sets culture by modeling behavior and by the policies they set. The behavior of a CEO has a profound effect throughout an organization. Behavioral scientist Dan Ariely’s (Dis)Honesty Project shows that when a cultural norm of dishonesty sets in, everyone jumps on board.

Some people speculate that this will bite Trump, and ultimately discredit him. Others think we will simply normalize to the lies. If so, given Ariely’s research, that could pose a real danger for America as a culture to begin to see lying as a perfectly fine way to interact.

While I was writing this post, Trump forbid all government agencies from talking with the press. This level of government secrecy is unprecedented in a democratic government. Culturally, the message being sent is one of a change to a command-and-control style of governance, rather than a culture of government accountability to the people.

Summary

The command-and-control messages Trump is sending are very worrisome. They constitute not just a cultural shift from Obama, but a cultural shift for America as a country. A major goal of the Constitution was to create a government with checks and balances that could be accountable to the citizens. While the last several Presidents have moved increasingly in the direction of low transparency and accountability, Trump is taking this so far and so hard in the direction of non-democracy that it’s scary.

In terms of the cultural messages he’s sending on the social and immigration front, he is clearly not trying to send a message that all are welcome in America. With his cabinet picks, the executive orders he has chosen to sign in his first couple of days, and so on, he is sending a clear message that he will act in the interests of only specific groups in his policy-making. People who can’t afford healthcare or education, and women, are already getting the message that they can’t look to the government for help.

My article on the duties, responsibilities, and job description of a CEO, lays out four inherent parts of a CEO’s job. These are the parts of the job that, by definition, make a CEO a CEO. The CEO can delegate some things, but others simply can’t be delegated. Leading the top team is the CEO’s second main duty.

In the case of the President, the top team means the Cabinet. Most CEOs don’t immediately replace the top team of a company without seeking to understand something about who’s best for the job. Not so, the President. The President replaces the Cabinet immediately.

Hiring

Most people talk about elections as if it’s a middle school popularity contest. “My candidate won! Neener, neener, neener.” “My candidate lost, I hate you forever!!!” Let me be tasteful and diplomatic in saying that this is idiotic beyond belief (trust me, you don’t want to hear the non-diplomatic version).

Elections are a job interview. We may not like the slate of candidates we’re given, but they’re the candidates we have, and we have to choose one to fill the job.

I’ve heard it said that Trump was elected on the “pass it down” theory of competence: he doesn’t have to have great solutions, he just has to put the right people in place who have solutions.

Has he done that?

From his Cabinet picks, I don’t believe so. When hiring for a job, you generally look for relevant past experience, or a highly transferable skill set (e.g. general management).

A Cabinet pick oversees a multibillion-dollar organization. Not necessarily a business, an organization. Governmental bottom lines aren’t measured in dollars, but in civic terms.

Several appointees don’t necessarily know the playing field of the post they’ve been appointed to. That means that if they can get up to speed in any meaningful way, they have the same learning curve as someone just entering the field. I’m not sure that hiring candidates with the equivalent experience of a new college grad is the way to go.

In short, viewed solely through the lens of hiring the right person for the right job, it appears to me that Trump is not doing a good job.

Leading the team

Once he’s hired the team, he has to lead them. It’s too early to tell how he’ll do in that regard. Stay tuned.

Summary

Trump has appointed a top team whose qualifications for their specific roles are seriously in doubts. Many of his picks have no background in the areas they’ve been chosen to lead, no established reputations and connections in those areas, and no evidence in their backgrounds that they’ve managed similar efforts.

If I were an investor in a company whose CEO had just made these picks for leaders of the company, I would sell my stock.

UPDATE Jan 27, 2017:The entire senior administrative staff of the State Department just resigned. Good CEOs put proper succession planning in place for themselves, and understand the need for orderly transitions to keep things from spiraling out of control. Most institutional memory resides in the employees, not in the policies and procedures manuals. I’m extremely puzzled as to why Trump would allow something like this to happen, and not work harder to keep his senior team. This is a troublesome development, to say the least.

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One of the critical things I learned from Stever [was to]…give myself permission to want it all; to not think in terms of mutual exclusivity. The results have been remarkable. To date, I have built a business which is almost unprecedented in scale among independent entrepreneurs under the age of 40 and I can trace a lot of that right back to Stever.